This post is in the continuity of the personal-finance series where earlier blog post: Personal Finance - Investment was published in May 2020.
RBI published a very important ‘Indian Household Finance Survey’ in August 2017. The report highlighted that:
- The average Indian household holds 84% of its wealth in real estate and other physical goods, 11% in gold, and the residual 5% in financial assets. A disproportionately high share of wealth allocated to physical (i.e. non-financial) assets, such as gold.
- Under-investment in long-term insurance and pension products. Households can move up between 0.4 pp (percentage points) and 1.6 pp by taking on insurance to avoid the burden of emergency credit associated with medical costs
- Disproportionally large reliance on unsecured debt, mostly from non-institutional sources (e.g. moneylenders).
The need to finance adequate consumption during retirement is a huge issue, and when combined with the low penetration of insurance, households appear vulnerable to adverse shocks later in life. Even the middle class doesn’t even recognize how bad public healthcare and costly private healthcare is for the bulk of the Indian population.
The basic rule for personal finance is - "Keep Insurance and Investments separate." The financial services industry is one black hole for retail
consumers.The mischievous cross-selling at private financial
institutions on the supply side, and consumers' lack of financial
education on the demand-side compounds the problem to a great
extent.
Which financial products you need? Most people just need five simple products in life.
Fixed Deposit as a Liquid Fund, Index fund, Home Loan, Term
& Health insurance. All of the investments commences only after sufficiently covering oneself with sufficient Health, Life insurance cover, and liquidity to manage at least 6 months of living cost. For any financial product, keep a basic checklist: What is my investment? When? If yes, put numbers and dates. When does the return start to come in? Is the amount guaranteed in writing? What amounts are expected and on what dates? Is the return based on an assumption? What is that assumption?
Few insights can be used while taking decisions for pension and insurance.
1. Do NOT buy a bundled life insurance policy. Reasons: Poor life cover, Poor returns, and Heavy losses in case of withdrawal.
Pensioners and new parents are the most vulnerable targets for the agents. Look for a Term Insurance with optimum cover i.e. 200 times monthly expense.
2. It is never too early to start saving for retirement.
National Pension Scheme can be used to close this gap at the microscale. Under the scheme, The government of India contributed INR1,000 per year to each account, for
individuals that contributed themselves between INR1,000 and
12,000 per annum. Equity investments are already discussed in the previous post on personal finance.
3.The medical inflation rate in India is around 15-20 %
annually which is much above the general inflation level. This means that a single hospitalization can exhaust the lifelong savings!
More can be read here. Summary:
- Take Health Insurance
- Reveal the right information and never hesitate to go for a medical test.
- Avoid Third-Party Administrator and Copay clause while exploring health insurance plans.
4. Settling a debt must be the first priority. To debtors,
creditors are like dictators. Always look for a lower interest rate and cut back big expenses.
5. Plan a Budget: When there is difficulty in managing the
finance, a budget should be used as a tool for the allocation of
the money according to the priorities both in good and bad times.
6. Emergency Fund: A family must have 3-6 months worth of living
expenses stowed away in an immediately accessible bank account.
In a recent webinar with Monika Halan, an authority on personal finance in India, three questions were discussed in detail.
How big should one’s retirement pot be at the age of 40, 50 & 60?
How does one asset allocate one’s retirement across various physical and financial assets? How should one think about life insurance and health insurance in the context of his/her own long term savings plan?
She told them in a concise manner that can be viewed on youtube. I will recommend the readers to read the book "Let's Talk Money" and weekly columns of Ms. Uma Shashikant to plan personal finance more carefully.
